Long Term Capital Gains Tax Rate

The
length of time of the holding of a particular investment represents the major
factor in determining the capital gains tax. As a rule, the longer you hold a
particular investment, the lower the tax rate percentage you are going to be
charged. This is done in order for the long-term investments to be encourages.
As a result, the holding periods required to maintain in order to benefit from
a certain tax rate is constant, whereas the rate itself is liable to change.

Therefore
it is of high importance to distinguish between:

Trade date - this is the day at which your broker has
sold or bought a particular investment, and

Settlement date - this is the day at which the actual
transference of certificates has occurred.

Therefore,
the trade date is the one that the government uses in order to determine the
period of time during which you have held a particular investment.

Next
we are going to examine the specific capital gains on assets held for:

Less than an year

If
you decide to withdraw the appreciated assets only a year after you have become
their owner, then you will face the greatest percentage of capital gains tax.
Usually, the capital gain tax will be calculated in the following way: earned
income + capital gains = personal income rate. After this, the gain will be
taxed at this rate. Unfortunately, the possibility of being charged a twice as
much as a long-term investment tax is highly increased.

Between one and five years

Long
term investments are defined by the IRS as those assets that are held for more
than a year. Generally, the capital gains tax has been set at 20%, but an
exception is made for those of you who fall in the 15% tax bracket. Then, your
capital gain tax rate will be considerably decreased. The more favorable tax
treatment towards investments that were held for a longer period of time has
triggered the trend toward buy-and-hold strategies of many value investors.

More than five years

You
are liable to an 18% capital gains tax rate only if your investment is done
before January 1, 2001. An additional requirement that should be met is that
the length of time you have held the investment should not be less than five
years.

Impacts of Capital Gains Taxes

Capital
gains taxes have a great influence on your investment in terms of the direction
of your future financial decisions. As it can be seen from the previously
provided information, the longer you hold an investment the more you benefit
from lower tax rates. In order to make a clearer view of this, consider the
following example:

Mary
invests $50,000
in stocks. She falls in the 31.6% tax bracket. Unfortunately she needs the money for other
purposes and sells the stocks ten months later with a 62% return. As a result she acquires $81,000. Therefore, she has
gained $31,000 from which $9,796 should be deducted in the
form of a capital gain tax. Finally, she ends up with a profit of $21,204.

Let's
imagine that instead she finds another source to cover her emergency situation
and waited just two more months leaving her $50,000 for a whole year in the stocks. She sells the stocks with
a 55% return on the
investment that is $27,500 capital gains. Having held the investment for a year, now she
faces a lower tax rate and has to pay only $4,125. As a result she has a $23,375 profit.

As
it was shown by the previous example, even though in the second case the return
on the investment was lower, it was compensated by the lower tax rate, which
was thanks to the longer time of holding the investment. Thus, capital gains
taxes can have serious implications and effects on your investments.